I have not filed in years; where do I start?
In the event that you have not filed US expat taxes in years, know that this situation is more common than you might think. You should start by talking with an expat tax expert to identify how many years of back taxes you are going to need to file and what documentation you need in order to complete the necessary reports and returns to become compliant with the US tax authorities. Note that you will need to prove expat status for each year.
Be aware that you may owe penalties for filing late or failing to pay taxes on time. Generally speaking, this will only be the case if you owed money on your US taxes and that will have caused interest and penalties to accrue on the underpayment.
Again, generally speaking, if you are a US expat, you will not face penalties for not filing the FBAR if you voluntarily come forward and file your taxes and submit the FBAR forms for the years you missed.
How many years do I need to file?
Calculating how many years of US expat taxes you need to file depends on your situation. Typically, six years will be sufficient for the IRS to consider you “caught up.”
If you are trying to sponsor a spouse for US citizenship, up to eight years may be required in order to prove your ability to support your spouse as a US citizen. If you need to get caught up to prove financial merit, such as a loan application, three years is generally enough.
That said, every situation is different; you should discuss your options with an expat tax expert to make sure you file the correct number of returns.
What documents do I need to have on hand to file?
Generally speaking, the most useful documents to have available are US tax returns from previous years and expatriate tax returns for your host country. If you are a late filer and do not have any US tax return available, then we can work around this.
You will need statements of income, capital gains, interest earned, mortgage interest paid or student loan interest paid, your housing expenses, dependents, etc. If you have a local tax return, that is usually a great place to start. For more information, please visit our US Expat Taxes Explained Series.
What are the penalties for filing late?
The IRS evaluates each situation on a case-by-case basis, so no penalties are set in stone. That said, the IRS does have penalties for filing late.
The Failure to File Penalty is 5% of the taxes owed for every month the return is filed late. This is capped at 25% of the taxes owed. If the return is filed more than 60 days late, the penalty is $135 or 100% of the taxes due, whichever is lower.
The Failure to Pay Penalty is .05% of the taxes overdue every month, and is also capped at 25%. If both penalties are applied to a given taxpayer, the Failure to Pay Penalty is deducted from the Failure to File Penalty.
The IRS does charge interest on any underpayment. The interest rates changes, but is currently at 4%.
The IRS will apply penalties after reviewing the taxpayer’s intent and reasons for filing late; in the end, the agent who evaluates your case will have the final call.
Note that the FBAR penalties can be much higher. The US Department of the Treasury reserves the right to seize up to 50% of the assets in overseas bank accounts or $100,000 per account, whichever is higher. However, this is generally only done in cases where people are deliberately hiding assets overseas to avoid taxation. Expats are generally not penalized if they voluntarily come forward.
Is e-filing available for late filers?
E-filing is available for US expatriate tax returns, but only if the returns are filed on time. Late filers will need to mail in paper copies of their tax return.
Is there an extension on the Offshore Voluntary Disclosure Initiative?
The IRS did offer extensions on the Offshore Voluntary Disclosure Initiative (OVDI), but the extensions needed to be filed by the September 9th deadline. If you have not filed under the OVDI, there is not an amnesty program you can currently file under. However, the IRS has issued an update on how individuals residing outside the US will be impacted if they volunteer to catch up on their US taxes. The update is FS-2011-13 Information For US Citizens or Dual Citizens Residing Outside the US.
Do I need to file any additional forms, such as the FBAR?
The FBAR will need to be turned into the US Department of the Treasury for any year that a taxpayer had financial interest in accounts that totaled more than $10,000 at any given time during a given year. The US Department of the Treasury has significant penalties for failing to file, including the seizure of assets; if you are behind with Form TD F 90-22.1, you should get caught up as soon as possible.
I neglected to report my worldwide income on previous returns. What can I do?
In the event that you have incorrectly reported information on prior years’ tax returns, you should file an amended return to avoid penalties from the IRS for incorrectly reporting your income. Depending on the situation, you may not end up owing any taxes after the credits and deductions applicable to expatriates have been applied to your return.
I have not heard from the IRS; should I bother filing?
We have many clients who feel that they are under the radar when it comes to filing US expat taxes and other reports that are due to the US authorities. While this may be the case, in the event that you are caught by the IRS or the US Department of the Treasury (even if you are a “small fish”), the penalties will be exercised to the maximum amount, including steep financial burdens and potential jail time. The IRS policy seems to be give leniency to people who come forward and punish people they catch. As a result, we strongly recommend any late filer become compliant with all US authorities as soon as possible.
